Is There Drama and Opportunity in Soda?

Coca-Cola (NYSE:KO) recently purchased a 10 percent stake in Green Mountain Coffee Roasters (NASDAQ:GMCR). This led to a 27 percent one-day spike in Green Mountain’s stock price, followed by a 5.53 percent gain the next day. When a stock pops on a partnership deal like this, it’s often an overreaction to the upside and the stock sells off a little the next day. But this isn’t your ordinary deal.

Green Mountain now has a 10-year deal with one of the most powerful brands in the world. An at-home beverage system for Coke isn’t yet available, but Coca-Cola is likely to market it once it’s available, which is a big plus for Green Mountain. Coca-Cola needs to make small moves such as this one in order to maintain its brand strength in the United States.

The rise of the health-conscious consumer has led to declining demand for soft drinks, which accounts for approximately 70 percent of Coca-Cola’s revenue. Fortunately, Coca-Cola has two big things going for it. One, 60 percent of its revenue is generated from international markets (soft drink volume jumped 8 percent in China last quarter year over year). Two, Coca-Cola has $20.51 billion in cash, allowing it to aim for inorganic growth domestically by buying up smaller growth companies.

Coca-Cola invested $1.25 billion in Green Mountain, and this investment is projected to lead to a $500 million annual return. That’s a quality long-term investment, but it’s not going to lead to investor elation. For Green Mountain, the deal solidified its brand and greatly increased its odds of long-term success. However, is Green Mountain likely to present the best investment opportunity as a result of this deal?

Playing the Other Side

SodaStream has been barking loudly about its advantages over traditional soda companies, primarily focusing on convenience and less sugar. Is it possible that Coca-Cola opted to partner with Green Mountain because of these ads? This would be difficult to imagine, but you can’t rule it out as a possibility. Coca-Cola is still run by human beings, and human beings can act in funny ways at times.

Now the rumors are that PepsiCo might swoop in and buy at least a small percentage of SodaStream. This is a possibility, but it’s not likely to happen soon. When the masses are asking a specific company to dance, that company is more likely to sit in the corner and wait patiently for a more timely opportunity. After all, these rumors led to a one-day 7 percent spike in SodaStream’s stock price. PepsiCo is a savvy and patient company. It’s not likely to cave in to public demand and pay a premium. Instead, it will wait for the right buying opportunity.

PepsiCo seen top-line growth 0.92 percent over the past year. Not fantastic, but better than Coca-Cola, which suffered a revenue decline of 1.35 percent over the same time frame. Even with the recent move by Coca-Cola, PepsiCo is more diversified, owning Frito-Lay, Quaker, Aunt Jemima, Cap’n Crunch, Life Cereal, Mountain Dew, Gatorade, Aquafina, 7UP, Tropicana, and more.

Speaking of revenue, since January 2011, Green Mountain and SodaStream have delivered top-line growth of 177.8 percent and 160.9 percent, respectively. Green Mountain has been growing a little faster, but due to its recent partnership with Coca-Cola, it’s now trading at 35 times earnings.

While long-term prospects are good, SodaStream should look more appealing since it’s trading at just 17 times earnings. Although not likely at any point in the near future, it is possible that PepsiCo (or another large company) takes a stake in the company. Even if this doesn’t come to fruition, speculation has the potential to drive the stock price higher. Even if that’s not the case, SodaStream is a consistently profitable company (net income up 6.65 percent over the past year) that continues to grow its top line. Therefore, it’s capable of thriving on its own.

Conclusion

If you’re looking to invest in a large and diversified company that offers resiliency to economic downturns and bear market environments, and you would like to receive an annual dividend yield of 2.90 percent, then you might want to consider PepsiCo. Note: Coca-Cola currently yields 3 percent.

If you would like to invest in a company that has greatly increased its odds of long-term success, then you might want to consider Green Mountain. However, the stock is somewhat expensive at 35 times earnings, which could make it more susceptible to unexpected bad news related to the specific company or the broader market. Those looking for growth without as much downside risk might want to consider SodaStream. It has demonstrated consistent top-line and bottom-line growth, it’s trading at 17 times earnings, and a future stake taken by a larger player is possible. However, SodaStream still isn’t as resilient as Coca-Cola or PepsiCo.